Federal Estate Tax Changes for 2011 and 2012 – Increased Tax and Gift Exemptions Equal Flexibility

The 2010 Tax Act made some significant changes to the estate tax system that could affect your estate.  Many attorneys have summarized the changes for their clients (special thanks to Gerry Beyer for his excellent summary), and I want to point out a few issues that will affect Minnesota farmers and business owners.  Here are some of the most important changes:

1. The Estate Tax exemption increased to $5 million per person.  This means that a married couple has a total of  $10 million of exclusion to use between them.  While $5 or $10 million sounds like a lot of money, remember that Minnesota farmland values are increasing.  If you own land, be sure that it is properly divided between you and your spouse to make the best use of your exemption.
2. The maximum rate for gift and estate tax has decreased from 55% to 35% only in 2011 and 2012.  Congress likes to keep people guessing about what the estate tax landscape may look like in the future, so don’t count on the lower tax rate beyond 2012.  It’s anyone’s guess what will happen at that time.
3. Spouses may now make use of a portability provision.  This means that unused exemptions from one spouse may be saved for use by the other spouse.  For example, imagine that Husband dies in 2011 with a personal estate worth $2.5 million.  Since he has an exemption of $5 million, he only needs to use half of that.  Wife now has a total exemption of $7.5 million for use upon her death.  However, if Wife remarries and Husband #2 dies, Wife loses Husband #1’s exemption.  Her total exemption would then be her $5 million plus Husband #2’s remaining exemption.  Hint: Don’t fail to file an estate tax return just because the first spouse to die is exempt from tax.  You don’t want to lose the portability for the remaining spouse.
4. The Generation Skipping Tax exemption has increased to $5 million through 2012.
5. The Lifetime Gift exemption is now $5 million, which is the highest it has ever been.  That exemption amount is set to expire at the end of 2012, so if you have a large estate, consider making gifts in 2011 and 2012 to take advantage of that exemption before it expires.

If it has been a while since you reviewed your estate plan, consider reviewing it now and anytime your life situation changes.  I am happy to discuss these changes with farmers, business owners, and rural Minnesota folks in need of estate planning advice.